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China Stocks Rebound from Brief Correction

China stocks rebounded Monday after a brief and shallow correction last week as foreign funds rolling into Hong Kong switched from local properties to mainland companies.

Hong Kong’s blue-chip Hang Seng Index slid 0.2% to 21,511 after last Friday’s drop ended a 10-day winning streak. The Index of Chinese companies had drifted lower throughout last week but climbed 0.9% Monday to 10,516. Turnover fell, but overseas cash continues to flow into the Hong Kong market.

New Hong Kong policies to curb soaring property prices diverted some of the foreign funds from local property stocks to infrastructure companies and other Mainland plays.

“Since the Hong Kong market is flooded with money now, there is a theory that funds would rotate out from this sector (Hong Kong properties) into other Chinese sectors such as Chinese banks, infrastructure, and cement stocks,” said Jackson Wong, vice president of sales at Tanrich Securities.

He added in an email to Equities that China had just announced major new funding for the solar energy sector, so those companies should do well this week.

As for the Hang Seng, Wong said the rush of foreign funds will ease risks of a big correction. He sees the index trading between 21,200, the 20-day moving average, and 21,850, the year-high. End

Chinese Stocks in the U.S.: -4.4, 386.8, 10-26-12, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong opened lower and traded in a narrow range in reduced turnover. Government measures to curb property prices pushed investors out of local property companies into Chinese stocks. Infrastructure firm CNBM (CBUMY) gained 4.0%.KGI Research

Quotable: "Looking ahead, the stock market should remain volatile, as major H-share companies will deliver their third quarter results. In addition, investors would also keep eyes on the US October payrolls report due next Friday as well as the 18th National Congress of Communist Party of China in the following week. Some economists expect the People’s Bank of China (PBOC) would cut rates or reduce reserve requirement ratio (RRR) after the Congress. The Hang Seng Index is expected to consolidate near 21,000-21,600 next week." BEA Securities. 10-26-12

Chinese Company to Watch: "CHINA EB INT'L (CEVIY) engage(s) in sewage and environment energy business, benefit(s) from government policy. Prospective P/E of 15x which is fairly valued." KGI Asia. 10-29-12

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For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN

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